Facts of the Case

  • M/s Dhoomketu Builders & Development Pvt. Ltd. was incorporated on 22.08.2005 and engaged in the business of real estate development.
  • The assessee was a wholly owned subsidiary of DLF Ltd.
  • During Assessment Year 2006–07, the assessee borrowed ₹186 crores from DLF Ltd.
  • The borrowed amount was deposited as earnest money for participating in a tender floated by the Official Liquidator of Karnataka High Court for acquisition of 140 acres of land belonging to NGEF Ltd.
  • The assessee was unsuccessful in acquiring the land.
  • Consequently, the earnest money was refunded along with interest amounting to ₹62,28,333.
  • Interest of ₹1,79,37,534 was payable by the assessee to DLF Ltd. on borrowed funds.
  • The difference amounting to ₹1,17,12,473 was claimed as business loss and sought to be carried forward.

Issues Involved

  1. Whether participation in a tender process and payment of earnest money constituted "setting up" of business under Section 3 of the Income Tax Act, 1961?
  2. Whether the assessee could claim the difference between interest received and interest paid as business loss?
  3. Whether actual acquisition of land is necessary before a real estate business can be regarded as set up?
  4. Whether expenses incurred before actual commencement of business are allowable deductions?

Petitioner’s Arguments (Revenue)

  • Mere participation in a tender process and deposit of earnest money cannot amount to setting up of business.
  • The business of real estate development can be considered set up only after actual acquisition of land.
  • Since the assessee failed to acquire land, business activities had not commenced during the relevant year.
  • The tax auditor himself stated that business activities had not commenced.
  • Therefore, interest income should be assessed under "Income from Other Sources" and no business loss should be allowed.

Respondent’s Arguments (Assessee)

  • The business stood set up when the assessee took concrete steps toward acquisition of land.
  • Borrowing funds and depositing earnest money constituted business activities directed toward its core business objectives.
  • Actual acquisition of land was not relevant for determining setting up of business.
  • Setting up of business may precede actual commencement of business activities.
  • Failure of business efforts cannot determine whether business has been set up.

Court Findings / Order

The Delhi High Court upheld the Tribunal's order and dismissed the Revenue's appeals.

The Court held:

  • The expression "setting up" is distinct from "commencement" of business.
  • A business can be considered set up when it is established and ready to commence operations.
  • Participation in a tender process for land acquisition was a business activity integral to the assessee's real estate business.
  • Borrowing funds and depositing earnest money were concrete steps showing readiness to commence business.
  • Actual acquisition of land is not mandatory for establishing that business has been set up.
  • Expenditure incurred after setting up and before commencement may qualify for deduction.
  • No substantial question of law arose for consideration under Section 260A.

Revenue appeals were accordingly dismissed.

Important Clarification

The Court clarified an important distinction:

"Setting up of business" and "Commencement of business" are two separate concepts.

A business may be treated as set up even before actual operations commence if the assessee has taken substantive steps demonstrating readiness to undertake business activities.

The Court further clarified that actual success in business efforts is not a prerequisite for establishing that business has been set up.

Sections Involved

  • Section 3 of the Income Tax Act, 1961 – Previous Year and Setting Up of Business
  • Section 57(iii) of the Income Tax Act, 1961 – Deduction from Income from Other Sources
  • Section 260A of the Income Tax Act, 1961 – Appeal before High Court on Substantial Question of Law 

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2013:DHC:2028-DB/RVE23042013ITA5282012.pdf

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